Overview:
Adobe is a high-quality company. However, we are of the opinion that their current high-growth expectations are unsustainable in near future leading to a revenue growth of only high single digit and new technologies are putting pressure on their profit margins. This means, the company needs to either reinvest more money in the business to stay ahead of the competition or have to heavily invest on acquiring smaller firms to grow inorganically and increase the customer base. The Experience Cloud is a promising area for growth, but it’s not Adobe’s strongest point and Firefly (in partnership with Nvidia) has a long road ahead amidst of tough competition from already existing players.
Here’s our forecast for Adobe’s future:
Challenges:
Competition from AI-powered design tools could make it cheaper and easier for people to create designs, which could hurt Adobe’s revenue.
Loss of market share to new design platforms, as Mobile apps and browser-based design tools are becoming more popular, and they offer similar functionality to Adobe’s products at a lower cost.
Difficulty catching up in generative AI design as Firefly may struggle to compete with other established players like Midjourney and Dall-E2.
Regulators have blocked the acquisition of Figma, which could have given Adobe, access to larger customer base, and more pricing power.
Figma, a company popular among small and medium – sized businesses, a market, that Adobe has not traditionally focused on and will have to compete more directly for market share and which will be expensive and could hurt Adobe’s margins
Uncertainties:
An economic downturn would likely present a mixed bag for Adobe. While sales might suffer due to reduced customer spending, it could also weaken the competition.
Opportunities:
AI tools can make design software easier to use for people with no design experience. This could open up a new market for Adobe.
The Experience Cloud helps businesses track customer data and personalize marketing campaigns. This is a growing market, and Adobe could be a leader in this space.
VR and AR are still in their early stages, but they have the potential to revolutionize the way people interact with content. Adobe’s Aero product allows designers to create content for VR and AR experiences. This could be a big opportunity for Adobe in the future.
Assumptions:
Adobe has already captured a large share of the professional design market. This means that future growth will likely come from new markets and new technologies.
The increasing availability of design apps will make it more difficult for Adobe to attract new customers.
Customers are increasingly looking for ready-made design templates and workflows. This could hurt Adobe’s sales of traditional design software.
New startups are offering browser-based design tools that are cheaper and easier to use than Adobe’s products. This could lead to Adobe losing market share.
Financial projections:
Revenue of $30 billion by 2028 due to slower growth
EBITDA margin of 35% by 2028 due to lower profitability
Net Free cash flow of $5 billion by 2028 after accounting for capital expenditures and buy-backs.
Conclusion: We believe Adobe will remain a dominant player in the creative industry, but they will need to adapt to new technologies and competition to maintain their growth. The Experience Cloud and VR/AR are promising areas for future growth.
Disclaimer: As of the date of this report, we hold positions in ADBE; however, this report should not be considered as a recommendation to buy or sell.
